Friday, January 24, 2014

Immeasurably Extraordinary Foolishness

[My apologies to Dorf on Law's readers for missing my scheduled Thursday, January 23 post. It turns out that internet access abroad, even in advanced countries, is not entirely reliable.]

Well, the debt ceiling will be back soon. I don't like it any better than you do, but the whole mess is set to start up again in two weeks. The latest news is that the grace period created by the Treasury's use of "extraordinary measures" is likely to be very short this time around. According to a news article on Wednesday of this week, Secretary of the Treasury Jacob Lew has sent a letter to Congress explaining that the debt ceiling's "drop-dead date" is likely to come very soon -- certainly well before the mid-May date that Senate Majority Leader Harry Reid had been expecting.

Here, I will briefly explain the background on all of this. Then, I will try to explain exactly what the extraordinary measures are that the Treasury uses when it needs to "juggle the books" to prevent default, after the debt ceiling is formally reached. It turns out to be a surprising story, and it exposes even more clearly just how crazy the whole notion of the debt ceiling truly is.

There have been two brief time periods during which the debt ceiling law has been suspended. The first ran from last February 4 through May 19, and the second began on October 17 (with the end of the government shutdown -- a legally unrelated, but politically contemporaneous story) and runs through February 7, 2014. The laws that created each of those suspensions dictated that the debt ceiling would be reset at whatever level the debt had reached during its hibernation.

I have described elsewhere the silly political posturing involved in all this, and I have emphasized the notable lesson that living without a debt ceiling does not result in a limitless increase in debt. This is, of course, because changes in the total amount of debt result from the differences in annual spending and taxing, not because of the arbitrary dollar amount of the statutory debt ceiling at any given moment.

The most immediate reason that Secretary Lew's letter is important is that it lets everyone know that politicians will not have as much time to play around this time as they did a year ago. Back then, the lag between the awakening of the debt ceiling and the ultimate drop-dead date was almost exactly five months (May 19 through October 17), mostly because a strengthening economy increased revenues and decreased spending, compared to expectations. As Lew explains, however, reawakening the debt ceiling at the beginning of February -- with no distance at all between current debt and the debt ceiling -- is a particularly bad bit of timing. Because February sees a big outflow of tax refunds every year, and because that outflow this year is going to be increased by the shutdown-related narrowing of tax filing season, it is a very real possibility that the Treasury will exhaust its extraordinary measures in a matter of a few short weeks.

That is all very worrisome, because there has been no indication from Republicans that they are rethinking their determination to use the next debt ceiling renewal as a means to get all of the things they failed to get from the shutdown. If anything, the ultra-right's fury over the supposedly centrist compromise represented by the latest austerity budget will cause them to press even harder on the debt ceiling. Republican pseudo-wonk Paul Ryan is already on record as trying to recover credibility with the Tea Party by promising to play hardball on the debt ceiling.

Moreover, when Minority Leader Mitch McConnell announced that he would also refuse to increase the debt ceiling without Democratic giveaways, he did so apparently in response to a well-funded Tea Party primary challenge for his Senate seat. Had the extraordinary measures bought enough time to allow McConnell to win (or lose, for that matter) his primary, then he would have been able to return to his wheeler-dealer roots and make something happen on the debt ceiling. If this all comes to a head in February, on the other hand, his political stakes will be much higher -- so high as potentially to make the difference between a near-miss and an out-and-out economic disaster.

All of this means that things will heat up very soon, and that the margin for error will be smaller than ever. As it happens, Professor Dorf and I have drafted another article for publication in law reviews, making a new (non-"trilemma"-related, if you can believe it!) argument about the unconstitutionality of the debt ceiling. We will post that article on SSRN soon, and we will surely summarize our argument here on Dorf on Law. Not that we think the White House will listen to us this time around, either, but we are still the only game in town, when it comes to legal scholars who are actually engaging with the issues.

Notwithstanding all of that, an interesting background question has to do with those extraordinary measures that everyone (including me) keeps mentioning, but not explaining. How is it possible that the debt ceiling is not really a limit, such that we can reach the debt ceiling on one date, but have weeks or months during which we spend more than we collect in revenues, without exceeding the debt ceiling?

Most news reports that I have read describe a laundry list of measures, such as selling government assets, moving the payment dates back for certain obligations (where the law allows such delays), and other vague and unspecified tactics. The news article to which I linked above was even less specific, saying merely that "the Treasury shuffle[s] government accounts to meet its obligations." When I have tried to describe extraordinary measures in my public appearances, I have struggled to capture what is really going on. In a talk in Australia earlier this week, for example, I analogized Treasury's moves to "prosecutorial discretion." That was a good hand-waving move, I suppose, but it did not communicate anything meaningful.

In my defense, it has never been necessary to describe those extraordinary measures, in order to write about the subjects that I have discussed throughout this debate. It really does not matter what the extraordinary measures are, because what I care about is the possibility of default, pure and simple. If some bookkeeping maneuvers allow us to change the date of our collective economic execution, so be it. The politicians will wait until the last minute, whenever that is.

Even so, it might be interesting finally to lay out exactly what those extraordinary measures include. It turns out that Treasury does "juggle the books," but not in the way that most people understand that idea. A recent report from a major bank (which might be a proprietary report, so I am not citing it or linking to it) identifies five places to which Treasury turns when it needs to make funds come into existence, currently totaling about $265 billion. Other than "cash on hand," these sources carry curious names like "Civil Service Retirement and Disability Fund," "Federal Financing Bank," and similarly obscure government accounts.

Why do these particular sources offer respite from the debt ceiling? The simplest explanation is that Treasury can use them to exploit the nonsensical definition of debt that is covered by the debt ceiling statute. As I have noted many times, the debt ceiling limits the gross debt of the federal government, which is defined to include the Treasury securities that are held in internal government accounts, such that one federal agency agrees to pay another federal agency money in the future, should that become necessary. Currently, out of slightly less than $17.3 trillion in gross federal debt, almost exactly $5 trillion is actually intra-governmental debt, leaving net "debt held by the public" at about $12.3 trillion.

So, because Congress has decided to include non-debt in the determination of the total amount of debt that is subject to the ceiling, it has always been possible for Congress to redefine debt in a way that would end this silliness. Of course, they could then go back and mess things up again by lowering the ceiling on net debt, or by waiting until net debt rises to the existing limit, and then have another standoff. (The latter process might take a decade, on the current path of debt, but it is possible.) That is why the debt ceiling needs to be repealed or declared unconstitutional.

What does all of this have to do with extraordinary measures? It turns out that Congress has, in fact, explicitly allowed Treasury to temporarily reclassify "debt" under those various funds as non-debt. Even more amazingly, Treasury originally did this during Ronald Reagan's presidency, without prior Congressional authorization, and Congress blessed it after the fact.

As a 2013 report from the Congressional Research Service described it, in 1985 Treasury delayed issuing Treasury securities to various government investment accounts. Why? Because issuing those securities would have counted against the debt ceiling. To create room under the ceiling, "Treasury took the additional step of 'disinvesting' the Civil Service Retirement and Disability Trust Fund, the Social Security Trust Funds, and several smaller trust funds by redeeming some trust fund securities earlier than usual." In short, Treasury temporarily treated non-debt as the non-debt that it is, and it later went back to treating non-debt as debt, as Congress generally requires. And, as noted above, "Congress subsequently authorized Treasury to alter its normal investment and redemption procedures for certain trust funds during a debt limit crisis."

Now, therefore, Treasury is allowed by Congress to "prematurely redeem" securities in various trust funds, thus reducing the debt subject to the ceiling. Even better, "[b]ecause these funds are required by law to be made whole once the debt limit is increased, these specific actions did not affect federal retirees or employees once the debt limit was increased."

Notably, Congress's post-1985 blessing did not cover the Social Security Trust Funds, which are by far the biggest part of the non-debt that is covered by the debt ceiling law. Even so, Congress has created the space to extend the debt ceiling for a limited time by expressly allowing Treasury to play games with bookkeeping using other accounts.

Of course, if the public in general knew of this, they might think that this is all funky for exactly the wrong reason. We would surely hear George W. Bush-like cries that "the trust funds aren't REAL," as an excuse not to honor the long-term commitments that those trust funds actually do represent. The fact is, however, that the extraordinary measures created by Congress allow Treasury to flip back and forth between the legal baseline (including non-debt in the total amount of federal debt) and the sensible alternative (excluding non-debt from the debt subject to the ceiling).

No matter one's point of view on the path of debt overall, or even on the politics of the debt ceiling, this background story should be disturbing.

28 comments:

therefore, Treasury is allowed by Congress to "prematurely redeem" securities in various trust funds, thus reducing the debt subject to the ceiling. Even better, "[b]ecause these funds are required by law to be made whole once the debt limit is increased, these specific actions did not affect federal retirees or employees once the debt limit was increased."http://fifa14.mmo18.com/ | lol.mmo18.com